10-K 1 0001.txt FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549-1004 ---------- FORM 10-K ---------- [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended October 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- Commission file No. _______ COFFEE HOLDING CO., INC. (Exact name of registrant as specified in its charter) Nevada 11-2238111 (state or other jurisdiction of IRS employer incorporation or organization) identification number) 4401 First Avenue, Brooklyn, New York 11232-0005 (address of principal executive offices) (zip code) Registrant's telephone number, including area code (718) 832-0800 Securities registered pursuant to Section 12(b) of the Act: None ---- (Title of Class) Securities registered pursuant to Section 12(g) of the Act: None ---- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ___ No X . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting common stock held by non-affiliates of the Registrant cannot be determined as the common stock is not quoted or listed on any quotation system or market. As of September 30, 2000, the Registrant had 3,999,650 shares of common stock, par value $.001 per share, outstanding. ================================================================================ COFFEE HOLDING CO., INC. PART I This document contains forward looking statements. Forward looking statements are based on management's then current views and assumptions regarding future events and operating performance. These statements are subject to factors which could cause actual results to differ materially from those statements. For a more detailed discussion of forward looking statements and the factors which could cause actual results to differ, please refer to Item 7 herein. Item 1. Business Coffee Holding Co., Inc. (sometimes referred to herein as the "Company" or "Coffee Holding") conducts wholesale coffee operations, including roasting, blending, packaging, marketing and distributing coffees for sale under private labels and under its own brands of specialty coffees. The Company also sells unprocessed green coffee to specialty gourmet roasters. Coffee Holding's sales are primarily to customers located throughout the United States. Coffee Holding Co., Inc. was originally incorporated in New York in 1971. Pursuant to an Agreement and Plan of Merger between Coffee Holding Co., Inc. and Transpacific International Group Corp. (the "Merger Agreement"), Coffee Holding merged with and into Transpacific International Group Corp. ("Transpacific") in February, 1998, with Transpacific being the surviving corporation (the "Reverse Acquisition"). After the merger, Transpacific changed its name to Coffee Holding Co., Inc. Transpacific was incorporated in Nevada in 1995 for the sole purpose of acquiring or merging with an unspecified operating business. Transpacific had no operating assets and did not engage in any business activities other than seeking and investigating other businesses for potential merger or acquisition. On August 12, 1996, Transpacific commenced a "blank check" offering pursuant to Rule 419 of the Securities Act, selling 3,000 shares of common stock at $6.00 per share, which generated $18,000 in gross proceeds from approximately 35 different investors. Pursuant to Rule 419, all of the gross proceeds from the offering, less 10%, and the shares of Transpacific purchased by the investors were held in escrow pending distribution of a prospectus to each of them describing any prospective business acquisition by Transpacific and the subsequent confirmation of holders of at least 80% of the shares that they elected to remain investors. All but one investor reconfirmed their investment and the merger was consummated. Pursuant to the Merger Agreement, the Transpacific common stock was split ten for one and 3,000,000 shares were issued to Coffee Holding shareholders in exchange for the outstanding shares of Coffee Holding. All descriptions of the business of Coffee Holding contained in this Form 10-K prior to the date of the merger describe the operations of the New York corporation named Coffee Holding Co., Inc. and, from the date of the merger, the operations of the Nevada corporation currently named Coffee Holding Co., Inc. Unless otherwise specifically stated herein, all descriptions of Coffee Holding and its operations contained herein are as of the date of this Form 10-K. Products Coffee Holding's products can be divided into three categories: (i) Private label coffee (ii) Branded coffee; and (iii) Wholesale green coffee Private label coffee. Coffee Holding roasts, blends, packages and distributes coffee under private labels for companies throughout the United States and Canada. As of March 31, 2000, the Company supplied coffee to approximately 35 different wholesale and retail companies. Coffee Holding is currently the leading supplier for three of the largest wholesalers in the United States. -2- In the year ended October 31, 1999 ("fiscal 1999"), approximately 50% of Coffee Holding's sales revenue came from private label coffee sales, and, in fiscal years 1998 and 1997, 42% and 44% of revenues, respectively, came from those sales. Branded coffee. Coffee Holding roasts, grinds and blends coffee according to its own recipes and packages the coffee at its facilities. The Company then sells the packaged coffee in its proprietary brand label to supermarkets, wholesalers and individually owned stores throughout the United States, shipping directly from its factory. Coffee Holding's name brands of coffee are: Cafe Caribe, Cafe Supremo, Don Manuel, Fifth Avenue and Via Roma. The Company has acquired trademark registration rights for each of Coffee Holding's name brands. For further information regarding these trademark registration rights, see "Business--Trademarks and Domain Names." Each of Coffee Holding's name brands is directed at a particular segment of the consumer coffee market. Cafe Caribe, Coffee Holding's leading name brand by revenue, is a specialty espresso coffee that targets espresso coffee drinkers, in particular, the Latin American consumer market. Market research indicates that Latin American coffee drinkers consume up to four times as much coffee than other coffee drinkers and tend to be more brand loyal than other coffee drinkers. Cafe Supremo is a specialty espresso that targets espresso drinkers of all backgrounds and tastes. It is designed to introduce coffee drinkers to the tastes of dark roasted coffee. Don Manuel is a 100% Colombian coffee product made from the finest beans Colombia produces. 100% Colombian coffee is an upscale quality product which commands a substantial premium at retail compared to the more traditional brown coffee blends. Fifth Avenue is a blended coffee which has become popular as a second alternative to consumers who purchase private label coffee. Via Roma is an Italian style espresso targeted at the more traditional espresso drinker. In fiscal 1999, sales of Coffee Holding's branded coffees comprised approximately 6% of its sales revenues and, in fiscal 1998 and 1997, 10% and 8% of revenues, respectively, came from those sales. Wholesale Green Coffee. Coffee Holding sells and brokers green coffee beans to small roasters and coffee shop operators located throughout the United States. The Company purchases its green coffee from suppliers located primarily within the United States. The suppliers supply the Company with coffee beans from many countries, including Columbia, Mexico, Kenya, Indonesia, Brazil and Ethiopia, among others. In fiscal 1999, substantially all of the Company's purchases were from less than ten vendors. Management does not believe that the loss of any one vendor would have a material adverse effect on the Company's operations due to the availability of alternate suppliers. Coffee Holding carries over 50 different varieties of green coffee beans. Green gourmet coffee beans are sold unroasted, direct from the Company's warehouse to the small roasters and gourmet coffee shop operators which then roast the beans themselves. In fiscal 1999, wholesales of green coffee beans accounted for approximately 44% of Coffee Holding's sales revenues, and, in fiscal 1998 and 1997, approximately 48% and 47% of revenues, respectively, came from such sales. Although the overall coffee market is mature, the green coffee market represents the fastest growing area of the industry, as gourmet coffee houses are increasing in all areas of the United States. The Company currently has over 150 customers in this area. Raw Materials Coffee is a commodity traded on the Commodities and Futures Exchange. Coffee prices are subject to fluctuation. Over the past five years, the average price per pound of coffee beans ranged from approximately $.80 to $3.18. The price for coffee beans on the commodities market as of September 29, 2000 was $.83. The supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond Coffee Holding's control. Supply and price can be affected by many factors such as weather, politics and economics in the exporting countries. Increases in the cost of coffee beans can, to a certain extent, be passed -3- on to Coffee Holding's customers in the form of higher prices for coffee beans and processed coffee. However, there can be no assurance that the Company will be successful in passing coffee price increases to customers without losses in sales volume or margin. Drastic or prolonged increases in coffee prices could also adversely impact the Company's business as it could lead to a decline in overall consumption of coffee. Similarly, rapid decreases in the cost of coffee beans could force the Company to lower its sales prices before realizing cost reductions in its purchases. In addition, a worldwide supply shortage of gourmet coffee beans could have an adverse impact on the Company. Gourmet coffee, unlike most coffee, does not trade on the commodity market. Instead, it tends to trade on a negotiated basis at a substantial premium over commodity coffee pricing, depending on the origin, supply and demand at the time of purchase. The Company from time to time engages in the purchase and sale of coffee futures and option contracts to guard against the effects of fluctuations in the price of green coffee beans and supplement its supply of coffee, if necessary. See "Item 7A - Quantitative and Qualitative Disclosures About Market Risks" herein. Trademarks and Domain Names Coffee Holding holds trademarks, registered with the United States Patent and Trademark Office for all five of its proprietary coffee brands. Trademark registrations are subject to periodic renewal and the Company anticipates maintaining its registration. The Company believes that its brands are recognizable in the marketplace and that brand recognition is important to the success of its branded coffee business. Customers Coffee Holding sells private label and its branded coffee to four of the leading wholesalers in the United States: Supervalu, Nash Finch, Shurefine International and Wakefern Foods. For fiscal 1999, sales to these four companies accounted for approximately 37% of Coffee Holding's total sales. Sales of green coffee beans to Green Mountain Coffee Roasters accounted for approximately 20% of Coffee Holding's total sales. The Company historically has had short term contracts with some of these customers (generally one to three years in duration) and although the Company believes that it has a strong mutually beneficial relationship with those companies, there can be no assurance that these relationships will continue. The loss of any one of these relationships would likely have a material adverse effect on the Company's business. Competition The coffee market is highly competitive. Coffee Holding competes with other suppliers and distributors of green coffee beans, whole coffee beans and roasted coffees. The Company's whole bean coffees compete directly against specialty coffees sold at retail through supermarkets and a growing number of specialty coffee stores. Private Label Competition. There are approximately six companies that produce coffee for private label sale in the United States. Many other companies produce coffee for sale on a regional basis. Coffee Holding's main competitors are Kroger and Chock Full O' Nuts. Both Kroger and Chock Full O' Nuts, a division of Sara Lee, are larger and have more financing and resources than Coffee Holding does and therefore are able to devote more resources to product development and marketing. The Company believes that it remains competitive by providing a high level of quality and customer service. Private label coffee also competes with all of the branded coffee on the market. Chock Full O' Nuts also produces branded coffees which compete with their private label products. Brand Competition. Coffee Holding's proprietary brand coffees compete with many other brand coffees which are sold in supermarkets and specialty stores. The branded coffee market is dominated by several large companies: Kraft General Foods, Inc., Proctor & Gamble Co. and Nestle S.A., many of which have also begun to market gourmet coffee in addition to non-gourmet coffee. Smaller competitors include Chock Full O' Nuts and Tetley. Coffee Holding's large competitors have greater access to capital than the Company and have a greater ability to conduct marketing and promotions. The Company believes that, while its competitors' brands may be more recognizable nationwide, its proprietary brands are well recognized in the Northeastern United States and are distinguished by their distinctive flavors. -4- Wholesale Green Coffee Competition. There are many green coffee dealers throughout the United States. Many of these dealers have greater financial resources than Coffee Holding. However, Coffee Holding believes that it has both the knowledge and the capability to assist small specialty gourmet coffee roasters with developing and growing their business. Because the Company is also a roaster as well as a seller of green coffee, it can provide its roasting experience as a value added service to its gourmet roaster customers. While other coffee merchants may be able to offer a lower price for coffee beans, Coffee Holding markets itself as a partner to small roasters, with the ability to help them market their specialty coffee products and develop a customer base. The assistance the Company provides its customers includes training, coffee blending and market identification. Marketing The Company markets its private label and wholesale coffee through trade shows, industry publications, face to face contract and through the use of non-exclusive independent food and beverage sales brokers. Recently, the Company began to use its web site (www.coffeeholding.com) as a method of marketing itself and its coffee products. For its private label and brand coffees, the Company will from time to time, in conjunction with retailers and with wholesalers, conduct in-store promotions (e.g. coupons, price reductions, two for one sales). Seasonality Historically, consumer coffee consumption is greater in the winter months as compared to the other seasons. Employees Coffee Holding has 28 full-time employees, 22 of which are employed in the areas of coffee roasting, blending and packaging and six of which are in administration and sales. None of its employees are represented by unions or collective bargaining agreements. The Company's management believes that the Company maintains a good working relationship with its employees. In order to supplement its internal sales staff, Coffee Holding sometimes uses independent national and regional sales brokers who work on a commission basis. Item 2. Properties Coffee Holding is headquartered at 4401 First Avenue, Brooklyn, New York where it owns the land and an approximately 15,000 square foot building. The building houses the Company's executive offices as well as the Company's plant where it roasts, blends and packages its coffee. In March 1999, the Company paid in full the outstanding balance of $602,000 of a mortgage note, which note was secured by a first mortgage on the property. Coffee Holding also leases a 7,500 square foot warehouse located at 4425A First Avenue in Brooklyn from T & O Management. T& O Management is not affiliated with the Company or any of its officers, directors or shareholders. The Company pays an annual rent of $46,800. The lease expires on August 31, 2002. Coffee Holding also uses a variety of independent, bonded commercial warehouses to store its green coffee beans. Coffee Holding's management believes that the Company's facilities are adequate for its current operations and for the foreseeable future. Item 3. Legal Proceedings In the ordinary course of its business, Coffee Holding is a party to litigation involving its operations. The Company does not believe that the outcome of any current litigation will have a material adverse effect upon its business, financial condition or results of operations. Item 4. Submission Of Matters To A Vote Of Security Holders During the fourth quarter of the fiscal year covered by this report on Form 10-K, no matters were submitted to a vote of security holders. -5- PART II Item 5. Market For Registrant's Common Equity And Related Stockholder Matters The Company's Common Stock is not quoted or listed on any quotation system or market. The Company does not know of any firm that makes a market for the Common Stock. The number of registered holders of the Company's Common Stock at October 4, 2000 was approximately 472. In January 1998, prior to the date of the merger with Transpacific, Coffee Holding, while it was still a privately held "S" corporation, paid a distribution in the amount of $422,258 to its stockholders to pay personal income taxes. Since the January 1998 payment, the Company has never paid any cash dividends on its Common Stock and has no intention to do so in the foreseeable future. Item 6. Selected Financial Data The following selected data should be read in conjunction with the audited financial statements of the Company and management's discussion and analysis of the Company's financial condition and results of operations included elsewhere herein:
As of or for the Year Ended October 31, ----------------------------------------- 1999 1998 1997 ----- ----- ----- Operating data: Net sales ........................................ $23,089,592 $25,853,791 $26,120,519 Cost of sales .................................... 19,796,476 24,090,666 22,961,911 ----------- ----------- ----------- Gross profit ..................................... 3,293,116 1,763,125 3,158,608 Operating expenses ............................... 2,301,306 2,215,134 2,355,548 ----------- ----------- ----------- Income (loss) from operations .................... 991,810 (452,009) 803,060 Other income (expense), net (A) .................. (382,906) (650,020) (301,448) ----------- ----------- ----------- Income (loss) before income taxes ................ 608,904 (1,102,029) 501,612 Provision for state and local income taxes (B) ... 64,173 ----------- ----------- ----------- Net income (loss) (B) ............................ $ 608,904 $(1,102,029) $ 437,439 =========== =========== =========== Basic earnings per share (B) ..................... $.15 ==== Basic weighted average common shares outstanding . 3,999,650 =========== Pro forma (B): Historical income (loss) before income taxes ..... $(1,102,029) $ 501,612 Unaudited pro forma: Provision (credit) for income taxes ............ (424,000) 226,000 =========== =========== Net income (loss) .............................. $ (678,029) $ 275,612 =========== =========== Basic earnings (loss) per share ................ $ (.17) $ .07 =========== =========== Basic weighted average common shares outstanding 3,999,650 3,999,650 =========== =========== Dividends .......................................... $ -- $ 422,258 $ -- =========== =========== =========== Balance sheet data: Total assets ..................................... $ 6,511,598 $ 6,524,043 $ 6,794,629 =========== =========== =========== Long-term obligations (including current portion) $ 3,121,479 $ 3,882,804 $ 1,486,549 =========== =========== =========== Stockholders' equity (deficiency) ................ $ (319,178) $ (928,082) $ 595,432 =========== =========== ===========
-------------------------------------------------------------------------------- (A) Includes consulting and professional fees and other costs incurred in connection with the reverse acquisition totaling $327,087 in fiscal 1998. (B) As further explained in Notes 2 and 9 to the financial statements elsewhere herein, prior to the reverse acquisition on February 10, 1998, the Company had elected to be treated as an "S" Corporation. Therefore, it was not required to record any historical provision or credit for Federal income taxes, whereas it recorded provisions for state and local taxes at full or reduced rates. The unaudited pro forma provisions and credits for income taxes assume that the Company had not made the "S" Corporation elections during any portion of fiscal 1998 and 1997 and reflect an effective rate of approximately 45% for each period. There were no provisions or credits for income taxes in periods subsequent to the reverse acquisition primarily as a result of pre-tax losses incurred in those periods, the utilization of a portion of the related net operating loss carryforwards and/or the inability of the Company to recognize benefits from the net operating loss carryforwards due to the uncertainties related to the extent and timing of its future taxable income. -6- Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations Forward-Looking Statements The Private Securities Litigation Reform Act of 1995 (the "Act") provides a safe harbor for forward-looking statements made by or on behalf of the Company. Coffee Holding and its representatives may from time to time make written or oral forward-looking statements, including statements contained in this report and in our other filings with the SEC. These statements use words such as "believes", "expects", "intends", "plans", "may", "will", "should", "anticipates" and other similar expressions. All statements which address operating performance, events or developments that the Company expects or anticipates will occur in the future are forward-looking statements within the meaning of the Act. The forward-looking statements are and will be based on management's then current views and assumptions regarding future events and operating performance. We cannot assure that anticipated results will be achieved since actual results may differ materially because of risks and uncertainties. We do not undertake to revise these statements to reflect subsequent developments. The following are some of the factors that could cause actual results to differ materially from our forward-looking statements: o the impact of rapid or persistent fluctuations in the price of coffee beans; o fluctuations in the supply of coffee beans; o general economic conditions and conditions which affect the market for coffee; o the effects of any loss of major customers; o the effects of competition from other coffee manufacturers and other beverage alternatives; o changes in consumption of coffee; and o other risks which we identify in future filings with the SEC. You are strongly encouraged to consider these factors when evaluating forward looking statements in this annual report. We undertake no responsibility to update any forward-looking statements contained in this report. Year Ended October 31, 1999 (fiscal 1999) Compared to Year Ended October 31, 1998 (fiscal 1998) Net sales totaled $23,089,592 in fiscal 1999, a decrease of $2,764,199 or 11% from $25,853,791 in fiscal 1998. Although coffee sold increased by approximately 3 million pounds or 23% from 13 million pounds in fiscal 1998 to 16 million pounds in fiscal 1999, sales revenues decreased primarily due to lower selling prices for green coffee. Cost of sales in fiscal 1999 was $19,796,476, or 86% of net sales, as compared to $24,090,666, or 93% of net sales in fiscal 1998. Cost of sales consists primarily of green coffee and packaging materials. The decrease in cost of sales in fiscal 1999 was attributable to lower purchase prices for green coffee. Beginning around the end of fiscal 1998, the purchase price of coffee began to decline gradually and fiscal 1999 saw continuing decreases in the purchase price. As the price of coffee is cyclical and volatile and subject to many factors, including weather, politics and economics, the Company is unable to predict the purchase price of coffee in fiscal 2000 and beyond. The Company's gross profit in fiscal 1999 was $3,293,116, an increase of $1,529,991 or 87% from $1,763,125 in fiscal 1998. Gross profit as a percentage of net sales increased by 7% to 14% in fiscal 1999 from 7% in fiscal 1998. The increase in gross profit as a percentage of sales was primarily attributable to increased margins on sales of private label and wholesale green coffee as purchase prices for green coffee gradually declined throughout the year. Selling and administrative expenses were $1,911,306 in fiscal 1999, a decrease of $10,558 or 1% from $1,921,864 in fiscal 1998. As a percentage of net sales, this change represented a 1% increase from 7% in fiscal 1998 to 8% in fiscal 1999. Interest expense increased $23,061 or 6% from $363,445 in fiscal 1998 to $386,506 in fiscal 1999. The increase in fiscal 1999 was attributable primarily to additional average borrowings on the Company's credit line. The amount in fiscal 1998 included costs incurred in connection with the cancellation of a factoring agreement. -7- Other income (expense) in fiscal 1999 was a net expense of $382,906 compared to a net expense of $650,020 in fiscal 1998 which included $327,087 of consulting and professional fees and other costs incurred in connection with the reverse acquisition by Transpacific that was effectively completed on February 10, 1998. Primarily as a result of the increase in gross profit, the increase in other operating expenses and the absence of the charge for costs incurred in connection with the reverse acquisition, the Company had income of $608,904 before income taxes in fiscal 1999 compared to a loss of $1,102,029 before income taxes in fiscal 1998. As further explained in Notes 2 and 9 of the notes to the financial statements elsewhere herein, the Company was not required to record a provision for Federal income tax in fiscal 1998 because it had elected to be taxed as an "S" Corporation prior to the Reverse Acquisition on February 10, 1998 and it had a pre-tax loss for the period from February 11, 1998 to October 31, 1998. Although the Company had potential benefits of approximately $363,000 from the net operating loss carryforwards as of October 31, 1998, it did not record a credit for income taxes based on its pre-tax loss due to the uncertainties related to the extent and timing of its future taxable income. The Company did not record a provision for income taxes based on its pre-tax income in fiscal 1999 because it used a portion of the benefits available from the net operating loss carryforwards that were available as of October 31, 1998. Although the Company had potential benefits of approximately $89,000 from the net operating loss carryforwards as of October 31, 1999, it did not record a credit for income taxes based on its net operating loss carryforwards due to the uncertainties related to the extent and timing of its future taxable income. Since the Company had no historical provisions or credits for income taxes in fiscal 1999 and 1998, it had historical net income of $608,904 in fiscal 1999 compared to a historical net loss of $1,102,029 in fiscal 1998. The statement of operations included in the financial statements elsewhere herein presents unaudited pro forma provisions and credits for income taxes, net income and losses and related earnings (loss) per share information for 1998 and 1997 assuming the Company had not elected to be taxed as an "S" Corporation. The Company would have had a credit for income taxes of approximately $424,000 in fiscal 1998 assuming the "S" Corporation elections had not been made and it would have been able to carryback its net operating losses. The unaudited pro forma credit for income taxes reflects an effective rate of approximately 45% comprised of an 11% rate for state and local income taxes, net of the related Federal income tax effect, and a statutory Federal income tax rate of 34%. On an unaudited pro forma basis, the Company would have had a net loss of $678,029, or $.17 per share, in fiscal 1998 compared to the Company's historical net income of $608,904, or $.15 per share, in fiscal 1999. Year Ended October 31, 1998 (fiscal 1998) Compared to Year Ended October 31, 1997 (fiscal 1997) Net sales totaled $25,853,791 in fiscal 1998, a decrease of $266,728 or 1% from $26,120,519 in fiscal 1997. Although coffee sold increased by approximately 2 million pounds or 18% from 11 million pounds in fiscal 1997 to 13 million pounds in fiscal 1998, sales revenues remained steady due to lower retail coffee selling prices, particularly in the fourth quarter of fiscal 1998. Management attributes the decrease in revenue to declines in the selling price of retail coffee which began in the second quarter of fiscal 1998 and continued to the end of fiscal 1998 and the decision of management to reduce some selling prices to attract larger customers. Cost of sales in fiscal 1998 was $24,090,666, or 93% of net sales, as compared to $22,961,911, or 88% of net sales in fiscal 1997. Cost of sales consists primarily of green coffee and packaging materials. The increase in cost of sales in fiscal 1998 was attributable to higher green coffee purchase prices. The Company's gross profit in fiscal 1998 was $1,763,125, a decrease of $1,395,483 or 44% from $3,158,608 in fiscal 1997. Gross profit as a percentage of net sales decreased by 5% to 7% in fiscal 1998 from 12% in fiscal 1997. The decrease of gross profit as a percentage of sales was primarily attributable to lower margins on private label coffee and wholesale green coffee sales as a result of higher green coffee purchase prices and higher Company inventories. Margins were also reduced by management's decision to reduce some selling prices to attract larger customers. Selling and administrative expenses were $1,921,864 in fiscal 1998, a decrease of $175,867 or 8% from $2,097,731 in fiscal 1997. As a percentage of net sales, this change represented a 1% decrease from 8% in fiscal 1997 to 7% in fiscal 1998. The reduction in expenses was related to lower bad debt expense in fiscal 1998 versus fiscal 1997 which was partially offset by higher advertising, promotional and freight expenses as well as office salaries in fiscal 1998. -8- Interest expense increased $39,100 or 12% from $324,345 in fiscal 1997 to $363,445 in fiscal 1998. The increase in fiscal 1998 was attributable to costs incurred in connection with the cancellation of a factoring agreement that were charged to interest expense. Also, the average balances on the Company's replacement line of credit were higher although the applicable rate of interest was lower. Other income (expenses) in fiscal 1998 was a net expense of $650,020, which included $327,087 of consulting and professional fees and other costs incurred in connection with the Reverse Acquisition by Transpacific that was effectively completed on February 10, 1998. Other income (expense) in 1997 was a net expense of $301,448. Primarily as a result of the decrease in gross profit and the charge for costs incurred in connection with the reverse acquisition, the Company had a loss of $1,102,029 before income taxes in fiscal 1998 compared to income of $501,612 before income taxes in fiscal 1997. As further explained above and in Notes 2 and 9 of the notes to the financial statements elsewhere herein, the Company was not required to record a provision for Federal income tax in fiscal 1998 because it had elected to be taxed as an "S" Corporation prior to the Reverse Acquisition on February 10, 1998 and it had a pre-tax loss for the period from February 11, 1998 to October 31, 1998. Although the Company had potential benefits of approximately $363,000 from the net operating loss carryforwards as of October 31, 1998, it did not record a credit for income taxes based on the pre-tax loss due to the uncertainties related to the extent and timing of its taxable income. The Company was not required to record a provision for Federal income taxes in 1997 because it had elected to be taxed as an "S" Corporation. The Company would have had a credit for income taxes of approximately $424,000 in fiscal 1998 and a provision for income taxes of approximately $226,000 in fiscal 1997 assuming the "S" Corporation elections had not been made and it would have been able to carryback its net operating losses. The unaudited pro forma provisions and credits for income taxes reflect an effective rate of approximately 45% for each period comprised of an 11% rate for state and local income taxes, net of the related Federal income tax effect, and a statutory Federal income tax rate of 34%. On an unaudited pro forma basis, the Company would have had a net loss of $678,029, or $.17 per share, in fiscal 1998 compared to net income of $275,612, or $.07 per share, in fiscal 1997. Liquidity and Capital Resources As of October 31, 1999, the Company had working capital of approximately $502,000, which increased by $729,000 from its working capital deficiency of $227,000 as of October 31, 1998, and a total stockholders' deficiency of $319,000, which decreased by $609,000 from its total stockholders' deficiency of approximately $928,000 as of October 31, 1998. The Company had unrestricted cash balances of $265,000 as of October 31, 1999, whereas it had no unrestricted cash balances as of October 31, 1998. The Company's working capital increased primarily as a result of net income generated and the additional borrowings under its credit facility during fiscal 1999. The Company obtained a credit facility from Nationscredit Commercial Corp. and repaid its short-term obligations under a factoring agreement during fiscal 1998. The credit facility provides for a revolving line of credit up to $5,000,000 based on eligible trade accounts receivable and inventories and a term loan for equipment purchases of up to $500,000. The line of credit provides for borrowings of up to 85% of the Company's eligible trade accounts receivable and 60% of its eligible inventories. The outstanding balance of approximately $2,445,000 as of October 31, 1999 approximated the maximum amount that the Company could borrow based on its eligible trade accounts receivable and inventories as of that date. Interest is payable monthly at the prime rate plus 1% (an effective rate of 9.25% at October 31, 1999). Assuming the Company has sufficient collateral, substantially all of the balances outstanding under the credit facility will not have to be repaid until November 20, 2000. During fiscal 1999, net cash provided by operating activities totaled approximately $704,000 primarily as a result of the net income generated during that period, adjusted to eliminate the effects of charges for depreciation and amortization and the write-off of deferred mortgage costs, and an increase in accounts payable that were partially offset by increases in amounts on deposit with the Company's coffee broker and an increase in coffee inventories. -9- The Company financed the purchase of land and a building in 1989 through the issuance of a mortgage note in the amount of $1,050,000 payable to the New York City Industrial Development Agency. The mortgage note required monthly payments of $4,167 plus interest based at a variable rate set weekly. The payment of the mortgage note was secured by a first mortgage on the Company's land and building and the Company's restricted investments. The note was initially due to mature on November 1, 2009. On March 3, 1999, the Company repaid the mortgage note in full in the amount of $600,000. The Company generated a portion of the funds required for the repayment by liquidating approximately $433,000 of cash and cash equivalent investments that were restricted under the mortgage note. During fiscal 1999, the Company also used approximately $111,000 of its cash resources to purchase property and equipment and $303,000 to reduce its term loan and capital lease obligations. Capital expenditures were substantially below those made in fiscal 1998 and management does not believe that the Company's capital expenditures will be significant in fiscal 2000. The Company borrowed approximately $125,000 under the line of credit during fiscal 1999 for working capital purposes. As of October 31, 1998, the Company had a working capital deficiency of approximately $227,000, which decreased by $310,000 from its working capital deficiency of $537,000 as of October 31, 1997, and a total stockholders' deficiency of approximately $928,000, which decreased by $1,523,000 from its total stockholders' equity of $595,000 as of October 31, 1997. The Company had unrestricted cash balances of $199,000 as of October 31, 1997, whereas it had no unrestricted cash balances as of October 31, 1998. The Company's working capital increased primarily as a result of the conversion of short-term borrowings under the factoring agreement to long-term borrowings under the credit facility and through additional borrowings under its credit facility during fiscal 1998. During fiscal 1998, net cash provided by operating activities totaled approximately $1,333,000 primarily as a result of increases in amounts receivable from the Company's broker and an increase in accounts payable that were partially offset by the net loss generated during that year, adjusted to eliminate the effects of charges for depreciation and amortization and bad debts. During fiscal 1998, the Company used approximately $347,000 of its cash resources to purchase property and equipment. In addition to these cash expenditures, the Company also added property and equipment totaling $288,500 in fiscal 1998 by entering into capital leases. The capital expenditures were used to refurbish equipment and upgrade capacity and to purchase and install new manufacturing and other equipment associated with production. The Company used $667,000 of its cash resources to reduce its mortgage note, term loan, capital lease and related party obligations and placed approximately $367,000 in restricted cash and cash equivalent investments to secure the mortgage note payable, as explained above. The Company also paid dividends of $422,000 to its stockholders in fiscal 1998 to pay personal income taxes. The Company borrowed approximately $271,000 under the line of credit during fiscal 1998 for working capital purposes. Management believes, but cannot assure, that the Company will be able to finance its operations, including increases in accounts receivable and inventories, capital expenditures and debt repayments, during fiscal 2000 through cash provided by operating activities and/or short or long-term borrowings. The Company's line of credit with Nationscredit Commercial Corp. expires on November 20, 2000. Management is in discussions with the current lender to renew the line and with other lenders to replace the line, but there are no assurances that the Company will be able to renew or replace this line. In the event that the Company is unable to obtain a line of credit, management believes the Company could obtain loans by mortgaging its headquarters or by using its equipment as collateral. Year 2000 The Year 2000 problem concerns the possible inability of information systems and systems with embedded chip technology to properly recognize and process data-sensitive information beyond December 31, 1999. In the fall of 1997, the Company, and its information technology consultant, assessed the Company's personal computer hardware and its accounting software (which included accounts receivable and payroll and inventory management) for Year 2000 readiness. The Company concluded that its then accounting software and computer hardware and system were not Year 2000 compliant. The Company installed software modifications and upgrades to its accounting software in November 1997 at an approximate cost of $4,300. -10- In April and August 1999, the Company replaced its computer hardware and operating systems including its server and three workstations. The Company also added an additional workstation. The total cost of the equipment, installation and follow-up support was approximately $18,800. The Company also paid its consultant $1,400 to oversee installation of the operating system. As of June 30, 2000, with regard to Year 2000, the Company had not experienced any disruptions in its internal information systems or its business activities with its suppliers and customers. Item 7A. Quantitative And Qualitative Disclosures About Market Risks Market risks relating to the Company's operations result primarily from changes in interest rates and commodity prices as further described below. Interest Rate Risks The Company is subject to market risk from exposure to fluctuations in interest rates. At October 31, 1999, the Company's long-term debt, other than capitalized leases, consisted of approximately $148,000 of fixed rate debt and approximately $2,700,000 of variable rate debt under its revolving line of credit and term loan. Interest on the variable rate debt was payable primarily at 1% above a specified prime rate (an effective rate of 9.25% at October 31, 1999). The Company does not expect changes in interest rates to have a material effect on income or cash flows in fiscal 2000, although there can be no assurance that interest rates will not significantly change. Commodity Price Risks See Note 2 to the financial statements, Summary of Significant Accounting Policies - "Hedging" and "Recent Accounting Pronouncements," for additional information regarding the Company's hedging program and Statement of Financing Accounting Standard No. 133, Accounting for Derivative Instruments and Hedging Activities. The supply and price of coffee beans are subject to volatility and are influenced by numerous factors which are beyond the Company's control. The Company uses coffee futures and options contracts for hedging purposes to minimize the effect of changing green coffee prices and, if needed, to supplement its supply. At October 31, 1999, the Company held options covering an aggregate of 3,525,000 pounds of green coffee beans, which are exercisable in fiscal 2000 at prices ranging from $.85 to $1.05 per pound. The price per pound of green coffee on October 31, 1999 was $1.00. The Company generally has been able to pass green coffee price increases through to its customers, thereby maintaining its gross profits. However, the Company cannot predict whether it will be able to pass inventory price increases through to it customers in the future. See also "Raw Materials" in Item 1 for additional information in connection with commodity price risks. Item 8. Financial Statements And Supplementary Data See Item 14 herein. -11- Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure. On May 15, 1998, Transpacific dismissed German W. Chacon ("Chacon") who has been previously engaged as the principal accountant for Transpacific and had previously audited its financial statements as of September 30, 1997 and for the period from October 9, 1995 (date of inception) to September 30, 1997. Chacon's reports on Transpacific's financial statements for the period from October 9, 1995 to September 30, 1997 did not contain any adverse opinion or disclaimer of opinion, qualifications or modifications as to uncertainty, audit scope or accounting principles. There were no disagreements between Transpacific and Chacon on any matter of accounting principles or practice, financial statement disclosure or auditing scope or procedure within the period from October 9, 1995 to September 30, 1997 and the subsequent interim period preceding its dismissal which disagreement, if not resolved to Chacon's satisfaction, would have caused it to make reference to such disagreement. During the period from October 9, 1995 to September 30, 1997 and the subsequent interim period preceding Chacon's dismissal, there were no "reportable events" as set forth in Item 304(a)(1)(v) of Regulation S-K. On May 15, 1998, Coffee Holding dismissed the accounting firm of Ira D. Ganzfried & Company ("Ganzfried") which had been previously engaged as the principal accountants for Coffee Holding and had previously audited its financial statements as of October 31, 1996 and 1995 and for the years then ended. Ganzfried's reports on Coffee Holding's financial statements for the years ended October 31, 1996 and 1995 did not contain any adverse opinion or disclaimer of opinion, qualifications or modifications as to uncertainty, audit scope or accounting principles. There were no disagreements between Coffee Holding and Ganzfried on any matter of accounting principles or practice, financial statement disclosure or auditing scope or procedure for the years ended October 31, 1996 and 1995 and the subsequent interim period preceding its dismissal which disagreement, if not resolved to Ganzfried's satisfaction, would have caused it to make reference to such disagreement. For the years ended October 31, 1996 and 1995 and the subsequent interim period preceding Ganzfried's dismissal, there were no "reportable events" as set forth in Item 304(a)(1)(v) of Regulation S-K. The decision to change accountants was approved by the Board of Directors of the Company following the merger between Transpacific and Coffee Holding. The Company does not have an audit committee. On May 15, 1998, Coffee Holding engaged the accounting firm of J.H. Cohn LLP as the principal accountant to audit its financial statements in subsequent years. Neither Coffee Holding nor anyone acting on its behalf consulted with J.H. Cohn LLP prior to engaging them regarding the application of accounting principles to a specified transaction or the type of audit opinion that might be rendered on the Coffee Holding or Transpacific financial statements for which disclosure would be required by Item 304(a)(2) of Regulation S-K. PART III Item 10. Directors And Executive Officers Of Coffee Holding Co., Inc. Set forth below is information concerning the Company's directors and executive officers. The Company's board of directors currently consists of five directors. Directors are elected by a plurality of the votes cast at the Company's annual meeting of stockholders. Once elected, each director serves until the next annual meeting of stockholders and until his or her successor is duly elected and qualified, or until his or her earlier death, resignation or removal. Officers are appointed by the directors, and, once appointed, each officer serves until his or her successor is duly appointed, or until his or her earlier death, resignation or removal.
Name Age Position ---- --- -------- Andrew Gordon .............. [39] Chief Executive Officer, President, Treasurer and Director David Gordon ............... [35] Executive Vice President, Secretary and Director Gerard DeCapua ............. [39] Director Daniel Dwyer ............... [43] Director Matthew Phillips ........... [46] Director
-12- Andrew Gordon is Chief Executive Officer, President, Treasurer and a Director of Coffee Holding. He was previously a Vice President from 1981 to 1997. He has been a Director of Coffee Holding since 1981. Mr. Gordon received his B.B.A. degree from Emory University. He is the brother of David Gordon. David Gordon is Executive Vice President--Operations, Secretary and a Director of Coffee Holding. He was previously a Vice President and Operating Manager from 1983 to 1997. He has been a Director of Coffee Holding since 1983. Mr. Gordon attended Baruch College in New York City. He is the brother of Andrew Gordon. Gerard DeCapua has been a Director of Coffee Holding since 1997. He has his own law practice in Rockville Centre, New York since 1985. Mr. DeCapua received his law degree from Pace University. Daniel Dwyer has been a Director of Coffee Holding since 1998. Mr. Dwyer has been a senior coffee trader at Rothfos Corporation since 1995. Matthew Phillips has been a Director of Coffee Holding since 1998. Since 1991, Mr. Phillips has been a Vice-President of Branco Peres International, responsible for coffee trading operations. The Company currently does not have any standing committees. Item 11. Executive Compensation The following table sets forth certain compensation information for the Company's chief executive officer and each other executive officer whose salary and bonus compensation exceeded $100,000 for the fiscal year ended October 31, 1999. Summary Compensation Table
Annual Compensation --------------------------------------------- Name and Fiscal Salary Bonus All Other Principal Position Year ($) ($) Compensation ($)(1) --------------------------------------- ------ ------- ------ ------------------- Andrew Gordon ......................... 1999 160,000 50,000 8,896 Chief Executive Officer and President 1998 160,000 -- 24,379 1997 100,000 50,000 15,684 David Gordon .......................... 1999 160,000 50,000 6,970 Executive Vice President-- Operations 1998 130,000 -- 6,970 1997 100,000 50,000 8,268
---------- (1) The amounts set forth consist of amounts paid by the Company for the use of an automobile and automobile insurance. The Company has a stock option plan under which stock options to purchase shares of Company Common Stock may be granted to the Company's directors, officers and other key employees and consultants. The Company has reserved 2,000,000 shares of its Common Stock for issuance under the stock option plan. As of September 30, 2000, no options had been granted under the plan. The Company does not have employment agreements with any of its officers. Compensation of Directors Directors do not receive any compensation for their services. They are, however, reimbursed for travel expenses and other out-of-pocket costs incurred in connection with attendance at board of directors and committee meetings. Item 12. Security Stock Ownership Of Certain Beneficial Owners And Management The following table sets forth information regarding ownership of shares of the Company's common stock, as of October 4, 2000, by each person known to be the owner of 5% or more of the Company's common stock, by each person who is a director or executive officer and by all directors and executive officers as a group. When reviewing the following table, you should be aware that: (i) The amounts and percentages of common stock and preferred stock beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a "beneficial owner" of a security if that person has -13- or shares "voting power," which includes the power to vote or to direct the voting of such security, or "investment power," which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed to be a beneficial owner of securities as to which that person has no economic interest. (ii) Unless otherwise indicated by footnote, each person identified in the table below has sole voting power and investment power as to the shares beneficially owned.
Common Stock ----------------------- Number of Percentage Shares of Class ---------- ---------- Andrew Gordon(1).............................................. 1,970,378 49.3% David Gordon(1)............................................... 1,970,378 49.3% Gerard DeCapua ............................................... 100 * Daniel Dwyer ................................................. 100 * Matt Phillips ................................................ 100 * Rachelle Gordon(2) ........................................... 1,740,000 43.5% Rachelle Gordon Grantor Retained Annuity Trust ..................................... 1,350,878 30.8% Sterling Gordon .............................................. 199,600 5.0% Judy Melnick ................................................. 199,600 5.0% All directors and executive officers as a group (5 persons)(1) 2,590,178 64.8%
---------- * Less than 1%. (1) Includes 1,350,878 shares held by the Rachelle Gordon Grantor Retained Annuity Trust, of which Andrew and David Gordon are the co-trustees with the power to vote and dispose of the shares. (2) Includes 1,350,878 shares held by the Rachelle Gordon Grantor Retained Annuity Trust, of which Ms. Gordon is the grantor and beneficiary. Item 13. Certain Relationships And Related Transactions From time to time, certain of the Company's stockholders and directors and officers make loans to the Company for working capital purposes. At October 31, 1999, the Company had loans payable to certain of its stockholders and directors and officers in the principal amounts as follows: Rachelle Gordon -- $65,000 Sterling Gordon -- $43,000 David Gordon -- $38,000 Andrew Gordon -- $ 1,800 The loans are due on demand and bear interest at 10% per annum. Andrew Gordon and David Gordon have each guaranteed the payment of the Company's borrowings under its outstanding term loan from Naxtionscredit Commercial Corp. up to $100,000 in principal, plus interest and other costs and expenses. Daniel Dwyer, a director of the Company, is a senior coffee trader for Rothfos Corporation. Mr. Dwyer is responsible for the Company's account. The Company paid Rothfos $4,379,708 for green coffee purchases in fiscal 1999 and expects to pay it a similar amount in fiscal 2000. Matthew Phillips, a director of the Company, is Vice President of Branco Peres, International, responsible for coffee trading. The Company paid Branco Peres $231,755 in fiscal 1999 for green coffee purchases. -14- PART IV Item 14. Exhibits, Financial Statement Schedules, And Reports On Form 8-K (a) The financial statements and financial statement schedules listed below are filed as a part of this report. See Index to Financial Statements and Financial Statement Schedules beginning on Page F-1. 1. Financial Statements: -- Index to Financial Statements and Financial Statement Schedules -- Independent Auditors' Report -- Balance sheets as of October 31, 1999 and 1998 -- Statements of Operations for the Years Ended October 31, 1999, 1998 and 1997 -- Statements of Changes in Stockholders' Equity (Deficiency) for the Years Ended October 31, 1999, 1998 and 1997 -- Statements of Cash Flows for the Years Ended October 31, 1999, 1998 and 1997 -- Notes to Financial Statements 2. Financial Statement Schedules: II. Valuation and Qualifying Accounts and Reserves for the Years Ended October 31, 1999, 1998 and 1997 Other Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or notes thereto. (b) No reports on Form 8-K were filed by the Company during the fourth quarter ended October 31, 1999. (c) Exhibits Exhibit Number Exhibit Name ------- ---------------- 3.1 Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1998). 3.2 Certificate of Amendment to the Article of Incorporation of the Company (incorporated herein by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1998). 3.3 The Company's By-Laws (incorporated herein by reference to Exhibit 3.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1998). 10.1 Lease with T&O Management Corp. dated August 15, 1997 (incorporated herein by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1998). 10.2 1998 Stock Option Plan (incorporated hereby reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 1998). 16.1 Letter from German W. Chacon (incorporated by reference to Exhibit 16(a) to the Form 8-K of Transpacific International Group Corp. filed with the SEC on May 18, 1998). 16.2 Letter from Ira D. Ganzfried & Company (incorporated by reference to Exhibit 16(b) to the Form 8-K of Transpacific International Group Corp. filed with the SEC on May 18, 1998). 27* Financial Data Schedule. ---------- * Filed herewith -15- COFFEE HOLDING CO., INC. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE PAGE ---- (A) FINANCIAL STATEMENTS: REPORTS OF INDEPENDENT ACCOUNTANTS............................ F-2/3 BALANCE SHEETS OCTOBER 31, 1999 AND 1998................................... F-4 STATEMENTS OF OPERATIONS YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997................. F-5 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997................. F-6 STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997................. F-7 NOTES TO FINANCIAL STATEMENTS................................. F-8/15 (B) FINANCIAL STATEMENT SCHEDULE: II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997................... S-1 Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the financial statements or notes thereto. * * * F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors Coffee Holding Co., Inc. We have audited the accompanying balance sheets of COFFEE HOLDING CO., INC. as of October 31, 1999 and 1998, and the related statements of operations, changes in stockholders' equity (deficiency) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 1999 and 1998 financial statements referred to above present fairly, in all material respects, the financial position of Coffee Holding Co., Inc. as of October 31, 1999 and 1998, and its results of operations and cash flows for the years then ended, in conformity with generally accepted accounting principles. Our 1999 and 1998 audits referred to above included the information in Schedule II which presents fairly, in all material respects, when read in conjunction with the 1999 and 1998 basic financial statements taken as a whole, the information required to be set forth therein for the years ended October 31, 1999 and 1998. J. H. COHN LLP Roseland, New Jersey January 28, 2000 F-2 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors Coffee Holding Co., Inc. We have audited the accompanying statements of income, changes in stockholders' equity and cash flows of Coffee Holding Co., Inc. for the year ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1997 financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of Coffee Holding Co., Inc. for the year ended December 31, 1997, in conformity with generally accepted accounting principles. Our 1997 audit referred to above included the information in Schedule II which presents fairly, in all material respects, when read in conjunction with the 1997 basic financial statements taken as a whole, the information required to be set forth therein for the year ended October 31, 1997. IRA D. GANZFRIED & COMPANY Roseland, New Jersey December 23, 1997 F-3 COFFEE HOLDING CO., INC. BALANCE SHEETS OCTOBER 31, 1999 AND 1998
Assets 1999 1998 ----------- ----------- ----------- Current assets: Cash .......................................................... $ 265,044 Due from broker ............................................... 281,064 $ 150,592 Accounts receivable, net of allowance for doubtful accounts of $227,210 and $215,000 ................................. 2,416,700 2,243,798 Inventories ................................................... 1,478,485 1,359,954 Cash and cash equivalents restricted under mortgage note ...... 432,965 Prepaid expenses and other current assets ..................... 59,565 57,198 ---------- ---------- Total current assets ..................................... 4,500,858 4,244,507 Property and equipment, at cost, net of accumulated depreciation of $1,908,410 and $1,657,206 .................................. 1,983,317 2,123,429 Deferred mortgage costs, net of accumulated amortization of $48,611 56,784 Deposits and other assets ......................................... 27,423 99,323 ---------- ---------- Totals ................................................... $6,511,598 $6,524,043 ========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIENCY ---------------------------------------- Current liabilities: Mortgage note payable ......................................... $ 600,000 Current portion of term loan .................................. $ 87,312 87,312 Current portion of obligations under capital leases ........... 202,743 215,026 Accounts payable and accrued expenses ......................... 3,709,297 3,569,321 ---------- ---------- Total current liabilities ................................ 3,999,352 4,471,659 Term loan, net of current portion ................................. 192,119 279,431 Line of credit borrowings ......................................... 2,445,130 2,320,513 Obligations under capital leases, net of current portion .......... 46,161 249,325 Loans from related parties ........................................ 148,014 131,197 ---------- ---------- Total liabilities ........................................ 6,830,776 7,452,125 ---------- ---------- Commitments and contingencies Stockholders' deficiency: Preferred stock, par value $.001 per share; 10,000,000 shares authorized; none issued .................................. -- -- Common stock, par value $.001 per share; 30,000,000 shares authorized, 3,999,650 shares issued and outstanding ...... 4,000 4,000 Additional paid-in capital .................................... 480,997 480,997 Accumulated deficit ........................................... (804,175) (1,413,079) ---------- ---------- Total stockholders' deficiency ........................... (319,178) (928,082) ---------- ---------- Totals ................................................... $6,511,598 $6,524,043 ========== ==========
See Notes to Financial Statements. F-4 COFFEE HOLDINGS CO., INC. STATEMENTS OF OPERATIONS YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
1999 1998 1997 ----------- ----------- ----------- Net sales ......................................... $23,089,592 $25,853,791 $26,120,519 Cost of sales ..................................... 19,796,476 24,090,666 22,961,911 ----------- ----------- ----------- Gross profit ...................................... 3,293,116 1,763,125 3,158,608 ----------- ----------- ----------- Operating expenses: Selling and administrative .................... 1,911,306 1,921,864 2,097,731 Officers' salaries ............................ 390,000 293,270 257,817 ----------- ----------- ----------- Totals ................................... 2,301,306 2,215,134 2,355,548 ----------- ----------- ----------- Income (loss) from operations ..................... 991,810 (452,009) 803,060 ----------- ----------- ----------- Other income (expense): Interest income ............................... 3,600 40,512 22,897 Interest expense .............................. (386,506) (363,445) (324,345) Expenses in connection with reverse acquisition (327,087) ----------- ----------- ----------- Totals ................................... (382,906) (650,020) (301,448) ----------- ----------- ----------- Income (loss) before income taxes ................. 608,904 (1,102,029) 501,612 Provision for state and local income taxes ........ 64,173 ----------- ----------- ----------- Net income (loss) ................................. $ 608,904 $(1,102,029) $ 437,439 =========== =========== =========== Basic earnings per share .......................... $.15 ==== Basic weighted average common shares outstanding .. 3,999,650 =========== Unaudited: Historical income (loss) before income taxes .. $(1,102,029) $ 501,612 Pro forma: Provision (credit) for income taxes ...... (424,000) 226,000 ----------- ----------- Net income (loss) ........................ $ (678,029) $ 275,612 =========== =========== Basic earnings (loss) per share .......... $(.17) $.07 ===== ==== Basic weighted average common shares outstanding ..................... 3,999,650 3,999,650 =========== ===========
See Notes to Financial Statements. F-5 COFFEE HOLDING CO., INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY) YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
Common Stock ---------------------------------------- No Par Value $.001 Par Value Retained ------------------- -------------------- Additional Earnings Number of Number of Paid-in (Accumulated Shares Amount Shares Amount Capital Deficit) Total --------- -------- --------- ------- --------- ----------- ----------- Balance, November 1, 1996..... 100 $ 460,000 $ (302,007) $ 157,993 Net income.................... 437,439 437,439 ---- --------- ----------- ----------- Balance, October 31, 1997..... 100 460,000 135,432 595,432 Effect of reverse acquisition. (100) (460,000) 3,999,650 $4,000 $480,997 (24,224) 773 Net loss...................... (1,102,029) (1,102,029) Dividends paid................ (422,258) (422,258) ---- --------- --------- ------ -------- ----------- ----------- Balance, October 31, 1998..... -- -- 3,999,650 4,000 480,997 (1,413,079) (928,082) Net income.................... 608,904 608,904 ---- --------- --------- ------ -------- ----------- ----------- Balance, October 31, 1999..... -- $ -- 3,999,650 $4,000 $480,997 $ (804,175) $ (319,178) ==== ========= -======== ====== ======== =========== ===========
See Notes to Financial Statements. F-6 COFFEE HOLDING CO., INC. STATEMENTS OF CASH FLOWS YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
1999 1998 1997 ---------- ------------ --------- Operating activities: Net income (loss) ................................................... $ 608,904 $(1,102,029) $ 437,439 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization ................................... 252,925 239,687 170,579 Bad debts ....................................................... 12,210 53,391 522,499 Write-off of deferred mortgage costs ............................ 55,063 Changes in operating assets and liabilities: Due from broker ............................................... (130,472) 273,307 (299,922) Accounts receivable ........................................... (185,112) 561,012 (730,028) Inventories ................................................... (118,531) 19,429 (504,122) Prepaid expenses and other current assets ..................... (2,367) (30,132) 2,736 Deposits and other assets ..................................... 71,900 (42,132) (47,469) Accounts payable and accrued expenses ......................... 139,976 1,360,674 809,499 --------- ----------- --------- Net cash provided by operating activities ................... 704,496 1,333,207 361,211 --------- ----------- --------- Investing activities--purchases of property and equipment .............. (111,092) (347,260) (262,653) --------- ----------- --------- Financing activities: Net advances from factor ............................................ 505,053 Principal payments on mortgage note payable ......................... (600,000) (50,000) (50,000) (Increase) decrease in cash and cash equivalents restricted under mortgage note ................................. 432,965 (366,895) (22,897) Principal payments on term loan ..................................... (87,312) (87,312) Net advances under bank line of credit .............................. 124,617 271,340 Principal payments of obligations under capital leases .............. (215,447) (185,483) Advances from (repayments to) related parties ....................... 16,817 (344,018) (343,125) Dividends paid ...................................................... (422,258) --------- ----------- --------- Net cash provided by (used in) financing activities (328,360) (1,184,626) 89,031 --------- ----------- --------- Net increase (decrease) in cash ........................................ 265,044 (198,679) 187,589 Cash, beginning of year ................................................ -- 198,679 11,090 --------- ----------- --------- Cash, end of year ...................................................... $ 265,044 $ -- $ 198,679 ========= =========== ========= Supplemental disclosure of cash flow data: Interest paid ....................................................... $ 335,267 $ 334,567 $ 324,345 ========= =========== ========= Income taxes paid ................................................... $ 904 $ 104,664 $ 64,173 ========= =========== =========
Supplemental schedule of noncash investing and financing activities: During 1998 and 1997, the Company purchased equipment at a cost of $288,500 and $361,334, respectively, by incurring capital lease obligations. During 1998, the Company increased its obligations under the credit facility that provides it with the line of credit and term loan and decreased the balance payable to its factor through a direct transfer of $2,503,288 from the bank to the factor. See Notes to Financial Statements. F-7 COFFEE HOLDING CO., INC. NOTES TO FINANCIAL STATEMENTS Note 1--Business activities and reverse acquisition: Coffee Holding Co., Inc. ("Coffee"), which was incorporated in New York on January 22, 1971, conducts wholesale coffee operations, including manufacturing, roasting, packaging, marketing and distributing roasted and blended coffees for private labeled accounts and its own brands, and sells green coffees. The Company's sales are primarily to customers that are located throughout the United States. On February 10, 1998, the holders of all of the shares of Coffee's common stock consummated an exchange (the "Exchange") of their shares for shares of common stock of Transpacific International Group Corp. ("Transpacific"). Transpacific was incorporated in Nevada on October 9, 1995 and organized originally as a "blind pool" or "blank check" company for the purpose of either merging with or acquiring an operating company. It had been a development stage company with no significant operating activities or assets and liabilities prior to the Exchange. Transpacific, which had, effectively, 999,650 outstanding shares of common stock (with a par value of $.001 per share) prior to the Exchange, issued 3,000,000 shares of common stock in exchange for all of the 100 issued and outstanding shares of common stock (no par value) of Coffee. Concurrently, Coffee was merged into Transpacific (the "Merger") and Transpacific changed its name to Coffee Holding Co., Inc. Coffee Holding Co., Inc. after the Exchange, the Merger and the name change is referred to below as the "Company" or the "Combined Company." The "Company" is also used to refer to Coffee Holding Co., Inc. prior to the Exchange, the Merger and the name change. The stockholders of Coffee also owned 540,040 shares of common stock of Transpacific prior to the Exchange and, accordingly, they owned a total of 3,540,400 or 88.5% of the outstanding shares of the Combined Company immediately after the Exchange. Therefore, the Merger was treated, effective as of February 10, 1998, as a "purchase business combination" and a "reverse acquisition" for accounting purposes in which Transpacific was the "legal acquirer" and Coffee was the "accounting acquirer." The carrying values of the assets and liabilities of Transpacific, which were immaterial, were recorded at their historical carrying values as of February 10, 1998. Accordingly, the historical financial statements included herein only reflect the operations of Coffee for the period prior to February 10, 1998. All references to numbers of shares of common stock as of the dates or for periods prior to the Exchange have been restated to reflect the ratio of the number of common shares of Transpacific effectively exchanged for common shares of Coffee. Consulting and professional fees and other costs incurred in connection with the reverse acquisition totaling $327,087 were charged to expense in 1998. Information as to the unaudited pro forma results of operations of the Company assuming the Merger had been consummated as of, and the results of operations of Transpacific had been included from, November 1, 1996 has not been presented because such pro forma results would not differ materially from the historical results of operations for 1998 and 1997 reflected in the accompanying historical statements of operations. Note 2--Summary of significant accounting policies: Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Cash equivalents: Cash equivalents represent highly liquid investments with maturities of three months or less at the date of purchase. Inventories: Inventories are valued at the lower of cost (first-in, first-out basis) or market. F-8 COFFEE HOLDING CO., INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Property and equipment: Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets. Hedging: The Company uses futures and options contracts to hedge the effects of fluctuations in the price of green coffee beans. These transactions meet the requirements for hedge accounting, including designation and correlation. To obtain a proper matching of revenues and expenses, gains or losses arising from open and closed hedging transactions are included in inventory as a cost of the commodity and reflected in the statement of operations when the product is sold. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in the price of green coffee. Management believes that the overall exposure to credit risk is minimal. At October 31, 1999, the Company held options covering an aggregate of 3,525,000 pounds of green coffee beans which are exercisable in fiscal 2000 at prices ranging from $.85 to $1.05 per pound. At October 31, 1998, the Company held options covering an aggregate of 2,550,000 pounds of green coffee beans which were exercisable in 1999 at prices ranging from $1.10 to $1.35 per pound. The fair market value of these options, which was obtained from a major financial institution, was approximately $271,000 and $167,000 at October 31, 1999 and 1998, respectively. Due from broker includes the effects of deferred hedging losses of $198,532 and unrealized hedging gains of $123,222 at October 31, 1999 and 1998, respectively. Deferred mortgage costs: Costs incurred in connection with obtaining mortgage financing were capitalized and were being amortized over the term of the mortgage using a method that approximated the interest method. Amortization of deferred mortgage costs was not material in 1999, 1998 and 1997. The unamortized balance of the deferred mortgage costs was charged to operations in 1999 as a result of the prepayment of the mortgage loan (see Note 6). Advertising: The Company expenses the cost of advertising and promotions as incurred. Advertising costs charged to operations totaled $92,924, $140,397 and $99,600 in 1999, 1998 and 1997, respectively. Income taxes: Prior to the Merger on February 10, 1998, Coffee, with the consent of its stockholders, had elected to be treated as an "S" Corporation under the Internal Revenue Code. Accordingly, the Company's income or loss prior to that date was allocated to Coffee's stockholders for inclusion in their personal Federal income tax returns. Therefore, the Company was not required to record any historical provision or credit for Federal income taxes for the period prior to February 10, 1998. The Company had also elected to be treated as an "S" Corporation for New York state income tax purposes. However, New York imposes a tax on "S" Corporation income at a reduced rate and New York City does not recognize "S" Corporations. Therefore, the Company was required to record appropriate historical provisions and credits for state and local income taxes in periods prior and subsequent to February 10, 1998. The Company accounts for income taxes pursuant to the asset and liability method which requires deferred income tax assets and liabilities to be computed annually for temporary differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The income tax provision or credit is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. F-9 COFFEE HOLDING CO., INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Stock options: In accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," the Company will recognize compensation costs as a result of the issuance of stock options to employees based on the excess, if any, of the fair value of the underlying stock at the date of grant or award (or at an appropriate subsequent measurement date) over the amount the employees must pay to acquire the stock. Therefore, the Company will not be required to recognize compensation expense as a result of any grants of stock options to employees at an exercise price that is equivalent to or greater than fair value. The Company will also make pro forma disclosures, as required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), of net income or loss as if a fair value based method of accounting for stock options had been applied, if such amounts differ materially from the historical amounts. Earnings (loss) per share: The Company presents "basic" and, if applicable, "diluted" earnings per common share pursuant to the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128") and certain other financial accounting pronouncements. Basic earnings (loss) per common share is calculated by dividing net income or loss by the weighted average number of common shares outstanding during each period. The calculation of diluted earnings per common share is similar to that of basic earnings per common share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares, such as those issuable upon the exercise of stock options, were issued during the period. Since the Company had elected to be taxed as an "S" Corporation, it was not required to provide for Federal income taxes and it was only required to provide for state income taxes at a reduced rate prior to the date of the Exchange. SEC rules and regulations prohibit the presentation of earnings (loss) per common share amounts on a historical basis for the periods during which the "S" Corporation elections were in effect; instead, they require the presentation of basic and, if applicable, diluted unaudited pro forma earnings (loss) per common share amounts in the statements of operations for such periods assuming that the Company had been subject to Federal and state income taxes at statutory rates applicable to those companies that had not made "S" Corporation elections. Since the Company had elected to be taxed as an "S" Corporation for part of 1998 and all of 1997 and it had no potentially dilutive securities outstanding in 1999, 1998 and 1997, historical basic earnings per share is presented in the accompanying statement of operations for 1999 and unaudited pro forma earnings (loss) per share is presented in the accompanying statements of operations for 1998 and 1997. The weighted average common shares outstanding used in the computation of basic earnings per share in 1999 was 3,999,650 which was the number of shares of common stock actually outstanding during that year. The weighted average common shares outstanding used in the computation of unaudited pro forma basic earnings (loss) per share in 1998 and 1997 was also 3,999,650, which reflects the retroactive adjustment of the number of common shares of Transpacific actually outstanding to include only the 999,650 shares effectively outstanding as of the date of the Exchange and the 3,000,000 shares of common stock issued to the stockholders of Coffee in connection with the Exchange (see Note 1). Recent accounting pronouncements: In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which, as amended, is effective for all fiscal years beginning after June 15, 2000. SFAS 133 requires that all derivative financial instruments be recognized as either assets or liabilities in the balance sheet and measured at fair value. Management is in the process of evaluating the impact, if any, that SFAS 133 will have on the Company's financial statements. F-10 COFFEE HOLDING CO., INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Recent accounting pronouncements (concluded): The FASB and the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants had issued certain other accounting pronouncements as of October 31, 1999 that will become effective in subsequent periods; however, management of the Company does not believe that any of those pronouncements would have significantly affected the Company's financial accounting measurements or disclosures had they been in effect during 1999, 1998 and 1997. Note 3--Inventories: Inventories at October 31, 1999 and 1998 consisted of the following: 1999 1998 ---- ---- Packed coffee ........................ $ 211,620 $ 395,655 Green coffee ......................... 892,344 755,305 Packaging supplies ................... 374,521 208,994 ---------- ---------- Totals ............................. $1,478,485 $1,359,954 ========== ========== Note 4--Property and equipment: Property and equipment at October 31, 1999 and 1998 consisted of the following:
Estimated Useful Life 1999 1998 ---------- ---- ---- Building and improvements .................. 30 years $1,232,659 $1,220,110 Machinery and equipment .................... 7 years 1,709,915 1,627,366 Machinery and equipment under capital leases 7 years 694,609 694,609 Furniture and fixtures ..................... 7 years 113,544 97,550 ---------- ---------- 3,750,727 3,639,635 Less accumulated depreciation .............. 1,908,410 1,657,206 ---------- ---------- 1,842,317 1,982,429 Land ....................................... 141,000 141,000 ---------- ---------- Totals ................................... $1,983,317 $2,123,429 ========== ==========
Depreciation totaled $251,204, $234,525 and $165,417 in 1999, 1998 and 1997, respectively. Note 5--Cash and cash equivalents restricted under mortgage note: Restricted cash and cash equivalents at October 31, 1998 consisted of investments in the following interest-bearing accounts: Cash in escrow ........................................... $ 71,039 Certificate of deposit ................................... 361,926 -------- Totals ................................................ $432,965 ======== The restricted investments were pledged to secure a mortgage note payable (see Note 6). The restricted investments were liquidated in March 1999 in connection with the repayment of the mortgage note; accordingly, they were classified as current assets in the accompanying October 31, 1998 balance sheet. Note 6--Mortgage note payable: On June 1, 1989, the Company financed the purchase of land and building through the issuance of a mortgage note payable in the principal amount of $1,050,000 to the New York City Industrial Development Agency (the "NYCIDA"). The mortgage note, which had an outstanding balance of $600,000 at October 31, 1998, required monthly payments of $4,167 plus interest based on a variable rate set weekly by Bear Stearns & Co. The final F-11 COFFEE HOLDING CO., INC. NOTES TO FINANCIAL STATEMENTS--(Continued) payment was due on November 1, 2009. The payment of the note was secured by a first mortgage on the Company's land and building and the Company's restricted investments (see Note 5). At October 31, 1998, the Company was not in compliance with certain financial covenants in the NYCIDA agreement and, accordingly, the outstanding balance of the mortgage note payable was classified as a current liability in the accompanying October 31, 1998 balance sheet. The mortgage note was repaid in March 1999 and the remaining unamortized deferred mortgage costs of $55,063 were charged to interest expense. Note 7--Credit facility borrowings: The Company was obligated for borrowings under a factoring agreement until November 21, 1997 when it obtained a credit facility from Nationscredit Commercial Corp. consisting of a revolving line of credit and a term loan. The factoring agreement provided for borrowings of up to (i) 80% of the Company's eligible trade accounts receivable and (ii) 50% of its eligible inventories up to a maximum of $400,000. The outstanding balance of $2,503,228 at October 31, 1997 approximated the maximum amount that the Company could borrow based on its eligible trade accounts receivable and inventories as of that date. Interest was payable monthly at the prime rate plus 2% and borrowings up to $200,000, plus interest and other costs and expenses as defined, were guaranteed by a stockholder. The Company incurred costs of approximately $113,000 in connection with the cancellation of the factoring agreement that were charged to interest expense in 1998. The line of credit provides for borrowings of up to 85% of the Company's eligible trade accounts receivable and 60% of its eligible inventories up to a maximum of $5,000,000 through November 20, 2000 when the line of credit expires and any outstanding balance must be repaid. The outstanding balance of $2,445,130 and $2,320,513 at October 31, 1999 and 1998, respectively, approximated the maximum amount that the Company could borrow based on its eligible trade accounts receivable and inventories as of each date. Interest is payable monthly at the prime rate plus 1% (an effective rate of 9.25% at October 31, 1999). The term loan, which had an outstanding balance of $279,431 and $366,743 (including a current portion of $87,312) at October 31, 1999 and 1998, respectively, provides for borrowings of up to the greater of 80% of the cost of eligible equipment or $500,000. Principal is payable in monthly installments of $7,276 plus interest which is also at the prime rate plus 1% until November 20, 2000 at which time the outstanding balance must also be repaid. Two of the Company's stockholders have each guaranteed outstanding borrowings under the credit facility of up to $100,000, plus interest and other costs and expenses as defined. Note 8--Loans from related parties: The Company had loans payable to its stockholders of $148,014 and $131,197 at October 31, 1999 and 1998, respectively. The loans are due on demand, bear interest at 10% and are subordinated to the balance outstanding under the mortgage note payable. Interest expense was not material in 1999, 1998 and 1997. Note 9--Income taxes: As shown in the accompanying statements of operations, the Company had no historical provision or credit for income taxes in 1999 and 1998 and a historical provision for current state and local income taxes in 1997 comprised as follows: 1997 ---- State ........................................................ $ 4,173 Local ........................................................ 60,000 ------- Total historical ........................................... $64,173 ======= F-12 COFFEE HOLDING CO., INC. NOTES TO FINANCIAL STATEMENTS--(Continued) As explained in Note 2, prior to February 10, 1998, the date of the Exchange, the Company had elected to be taxed as an "S" Corporation and, accordingly, it was not required to provide for income taxes on its historical income before income taxes of approximately $1,028,000 and $502,000 for the period from November 1, 1997 to February 10, 1998 and the year ended October 31, 1997, respectively; however, it was required to provide for state income taxes at a reduced rate and New York City income taxes at the same rates as companies that had not made such an election during those periods. Although the Company became subject to Federal, state and local income taxes at full statutory rates for periods subsequent to the date of the Exchange, it had a historical loss before income taxes of approximately $2,130,000 for the period from February 11, 1998 to October 31, 1998. As a result of the loss for the period from February 11, 1998 to October 31, 1998 and certain other elections related to the termination of its "S" Corporation election, the Company had net operating loss carryforwards as of October 31, 1998 of approximately $800,000 available to reduce future Federal, state and local taxable income. There were no other material temporary differences as of October 31, 1998. Due to the uncertainties related to the extent and timing of the Company's future taxable income, the Company offset the deferred tax assets of approximately $363,000 attributable to the potential benefits from the net operating loss carryforwards as of October 31, 1998 by an equivalent valuation allowance and, accordingly, it did not recognize a credit for Federal income taxes for the period from February 11, 1998 to October 31, 1998. As a result of recording the valuation allowance for the period after February 10, 1998, and the "S" Corporation election for the period through February 10, 1998, the Company did not recognize any provision or credit for Federal income taxes for the year ended October 31, 1998. Since the Company had pre-tax income of approximately $609,000 in 1999, it had net operating loss carryforwards remaining as of October 31, 1999 of approximately $191,000 available to reduce future Federal, state and local taxable income which, if not used, will expire in 2013. There were no other material temporary differences as of October 31, 1999. However, due to the uncertainties related to the extent and timing of the Company's future taxable income, the Company also offset the deferred tax assets of approximately $89,000 attributable to the potential benefits from the net operating loss carryforwards as of October 31, 1999 by an equivalent valuation allowance. The Company did not recognize any provision or credit for Federal income taxes as a result of the reduction in the valuation allowance of $274,000 during the year ended October 31, 1999. The differences between the tax provision or credit computed based on the Company's historical pre-tax income or loss and the applicable statutory income tax rate and the Company's historical provisions and credits for Federal, state and local income taxes for 1999, 1998 and 1997 are set forth below:
1999 1998 1997 ---- ---- ---- Tax provision (credit) at statutory rate of 34% . $ 207,000 $(374,000) $ 149,000 Adjustments for effects of: State income taxes, net of Federal tax effect . 67,000 64,173 "S" Corporation election and termination of "S" Corporation election ..................... 11,000 (149,000) Change in valuation allowance ................. (274,000) 363,000 --------- --------- --------- Historical provision ...................... $ -- $ -- $ 64,173 ========= ========= =========
The Company's "S" Corporation election was in effect for part of 1998 and all of 1997. Unaudited pro forma historical provisions and credits for income taxes assuming the Exchange had occurred on November 1, 1996 and the Company was subject to Federal, state and local income taxes at full statutory rates for 1998 and 1997 (periods during which the "S" Corporation elections were in effect) are set forth below: 1998 1997 ---- ---- Federal ............................... $(262,000) $ 140,000 State ................................. (77,000) 41,000 Local ................................. (85,000) 45,000 --------- --------- Total pro forma (unaudited) ......... $(424,000) $ 226,000 ========= ========= F-13 COFFEE HOLDING CO., INC. NOTES TO FINANCIAL STATEMENTS--(Continued) The unaudited pro forma provisions and credits for income taxes reflect an effective rate of approximately 45% for each period comprised of an 11% rate for state and local income taxes, net of the related Federal income tax effect, and a statutory Federal income tax rate of 34%. Note 10--Lease commitments: Operating lease: The Company occupies warehouse facilities under an operating lease which expires on August 31, 2002 unless renewed at the option of the Company for an additional two years. The lease requires the Company to pay utilities and other maintenance expenses. Rent charged to operations amounted to $46,800 in 1999 and 1998 and $3,900 in 1997. Future minimum rental payments under the noncancelable operating lease in years subsequent to October 31, 1999 were as follows: Year Ending October 31, Amount ------------- ----------- 2000 .......................................................... $ 46,800 2001 .......................................................... 46,800 2002 .......................................................... 39,000 -------- Total ............................................................. $132,600 ======== Capital leases: As of October 31, 1999, the Company was obligated under various capital leases for machinery and equipment that expire at various dates through February 2001. Assets under capital leases are amortized over their estimated useful lives of seven years. Amortization of $96,271, $77,246 and $25,810 was charged to operations in 1999, 1998 and 1997, respectively. The future minimum lease payments under capital leases and the net present value of the future minimum lease payments at October 31, 1999 were as follows: Total minimum lease payments .................................. $277,621 Less amount representing interest ............................. 28,717 -------- Present value of net minimum lease payments ................... 248,904 Less current portion .......................................... 202,743 -------- Long-term portion ............................................. $ 46,161 ======== Note 11--Concentrations of credit risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, amounts due from broker and trade accounts receivable. The Company maintains its cash and cash equivalents in bank and brokerage accounts the balances of which, at times, may exceed Federal insurance limits. At October 31, 1999, the Company had cash balances that exceeded Federal insurance limits by $263,000. The net balance of the Company's investments in derivative financial instruments also represents an amount due from a broker. Exposure to credit risk is reduced by placing such deposits and investments with major financial institutions and monitoring their credit ratings. Approximately 20% of the Company's sales were derived from one customer during 1999 and 1998. That customer also accounted for approximately $400,000 of the Company's accounts receivable balance at October 31, 1999. Concentrations of credit risk with respect to other trade receivables are limited due to the short payment terms generally extended by the Company; by ongoing credit evaluations of customers; and by maintaining an allowance for doubtful accounts that management believes will adequately provide for credit losses. Management does not believe that credit risk was significant at October 31, 1999. F-14 COFFEE HOLDING CO., INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Note 12--Stock option plan: On February 10, 1998, the Company's stockholders consented to the adoption of the Company's stock option plan (the "Plan") whereby incentive and/or nonincentive stock options for the purchase of up to 2,000,000 shares of the Company's common stock may be granted to the Company's directors, officers, other key employees and consultants. Under the Plan, the exercise price of all options must be at least 100% of the fair market value of the common stock on the date of grant (the exercise price of an incentive stock option for an optionee that holds more than 10% of the combined voting power of all classes of stock of the Company must be at least 110% of the fair market value on the date of grant). As of October 31, 1999, no options had been granted under the Plan. Note 13--Major vendors: During 1999, substantially all of the Company's purchases were from nine vendors. An employee of one of those vendors is a director of the Company. Purchases from that vendor totaled approximately $4,400,000 in 1999. The nine vendors also accounted for substantially all of the Company's accounts payable at October 31, 1999. Management does not believe that the loss of any one vendor would have a material adverse effect on the Company's operations due to the availability of alternate suppliers. * * * F-15 COFFEE HOLDING CO., INC. SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES YEARS ENDED OCTOBER 31, 1999, 1998 AND 1997
Balance at Additions- Deductions Balance Beginning Charged From at End of Year to Income Reserves of Year 1999: -------- --------- -------- --------- Allowance for doubtful accounts ......... $215,000 $ 12,210 $227,210 ======== ======== ======== 1998: Allowance for doubtful accounts ......... $254,317 $ 53,391 $ 92,708 $215,000 ======== ======== ======== ======== 1997: Allowance for doubtful accounts ......... $134,200 $522,499 $402,382 $254,317 ======== ======== ======== ========
S-1 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, hereunto duly authorized. COFFEE HOLDING CO., INC. By: /S/ ANDREW GORDON ----------------------------- Andrew Gordon Dated: October 25, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed on October 25, 2000 by the following persons on behalf of the registrant and in the capacities indicated.
Signature Title --------- ----- /s/ ANDREW GORDON Chief Executive Officer, President, Treasurer and ------------------------------------------ Director (principal executive officer and principal Andrew Gordon financial and accounting officer) /s/ DAVID GORDON Executive Vice President--Operations, Secretary ------------------------------------------- and Director David Gordon /s/ GERARD DECAPUA Director ------------------------------------------- Gerard DeCapua /s/ DAN DWYER Director ------------------------------------------- Dan Dwyer /s/ MATT PHILLIPS Director ------------------------------------------- Matt Phillips
Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act Coffee Holding has not and does not intend to send an annual report to stockholders or proxy materials to its stockholders. INDEX TO EXHIBITS 27 Financial Data Schedule